Detailed Rationale

CRISIL Ratings has revised its rating outlook on the long-term bank facilities of South West Pinnacle Exploration Limited (SWPEL) to ‘Stable’ from ‘Negative’ and reaffirmed the rating at ‘CRISIL BBB’. The short-term rating has been reaffirmed at ‘CRISIL A3+’.

 

The outlook revision reflects the expectation of continued sound operating performance over the medium term led by healthy order book, acquisition of new clients and entry into new business domains. The operating income is estimated to have increased around 14% on-year to over Rs 118 crore in fiscal 2022, while the operating margin is estimated at 21.8% (Rs 104 crore and 22.9%, respectively, in fiscal 2021). Order book of around Rs 202 crore as on March 31, 2022, provides adequate revenue visibility over the medium term. Furthermore, SWPEL has bid for orders of Rs 500 crore.

 

That said, operations remain working capital intensive given the nature of business. Receivables and inventory are estimated at 203 days and 139 days, respectively, as on March 31, 2022, compared with 170 days and 210 days respectively, a year earlier. Timely realisation of receivables and moderation in inventory leading to reduction in the working capital cycle will be key monitorables.

 

SWPEL was recently awarded a partially explored coal block in Jharkhand for commercial coal mining. The mine development activities have started, and the company plans to start coal production in the next 30 months. The company is likely to undertake capital expenditure (capex) of around Rs 200 crore till the commencement of coal production, that is, till fiscal 2025, towards payment to government agencies, equipment, land acquisition and other infrastructure development. Funding for the capex has not yet been finalised and the company is considering various options including debt, follow-on public offer (FPO), qualified institutional placement (QIP), internal accrual, receipts against offtake agreements and/or any other mode of funding as per the market scenario at the time of fund raising. It is in the process of obtaining approvals at district and state levels, and the mine development plan is expected to be finalised over the next 6-9 months. The capex requirement for fiscal 2023 is estimated at Rs 7 to 8 crore. Prudent funding of the capex and its impact on the capital structure will be key monitorables.

 

The ratings continue to reflect the company’s strong technical expertise in drilling and exploration and its diversified customer base. These strengths are partially offset by large working capital requirement and the risks inherent in the tender-based business.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of SWPEL.

Key Rating Drivers & Detailed Description

Strengths:

• Strong technical expertise in drilling and exploration, and diversified customer profile

The company has experience of over 15 years in drilling and exploration of coal, minerals, coal-bed methane, oil and gas, and aquifer mapping. It expanded into the seismic services domain in fiscal 2020, winning a contract worth Rs 73 crore from Oil India ltd. Reinforcing its position in the domain, the company became the first of its kind by bagging integrated orders from Central Mine Planning & Design Institute Ltd (CMPDI) for drilling as well as 2D seismic data acquisition and processing.

 

It has 38 operational rigs with capacity to drill between 300 and 2,500 metres. The client base is diversified across segments and geographies and included both public and private sector players, such as Atomic Minerals Directorate for Exploration, Oil India Ltd, CMPDI, Central Ground Water Board, Directorate of Geology Dept. of Mines , ONGC Energy Centre Trust, SAIL, NMDC Ltd. ,Odisha Lift Irrigation Corporation Ltd (OLIC), Odisha Mineral Corporation, Mineral Exploration Corporation Ltd (MECL), Geological Survey of India, Hindustan Zinc Ltd, JSW Steal Ltd.. Arcelor Mittal India P. Ltd. Ultratech Cement Ltd., Vedanta Ltd., Reliance Ltd., and Hindalco Industries Ltd. This minimises risk of exposure to any one particular industry. Furthermore, the company has the ability to operate in multiple segments using the same resources and without requiring major additional capex.

 

In fiscal 2022, SWPEL acquired new clients such as Hindustan Copper Ltd and Hutti Gold Mines Company Ltd, and is executing its first project in Ladakh for ONGC Energy Centre Trust (to be completed this fiscal). Presently, company is  running 18 operations on Pan India basis .

 

• Healthy financial risk profile

Gearing is estimated to be healthy at 0.44 time as on March 31, 2022, while debt protection metrics were strong, with interest coverage and net cash accrual to total debt ratios estimated at 5.98 times and 0.4 time, respectively, in fiscal 2022.

 

The funding pattern for the coal mining project has not been finalised. Prudent funding of the required capex and its impact on the capital structure will be key monitorables.

 

Weaknesses:

• Working capital-intensive operations

Operations remain working capital intensive due to sizeable receivables and inventory. Receivables remained over 150 days in the past two years on account of a large chunk of retention money and unbilled revenue, though around 70% is due for payment in less than 30 days.

 

Inventories remained over 130 days in the past two years. The bulk of the ancillary equipment that is part of rigs has to be kept as inventory at all times on site, on account of the nature of operations, including attachments, which enhances the total inventory value. Also, the company has operations across India, mostly in remote areas, and has to maintain adequate inventory at all sites to ensure smooth operations.

 

CRISIL Ratings will continue to monitor the working capital cycle of SWPEL and any stretch in receivables will remain a key monitorable.

 

• Risks inherent in tender-based business

The company has to bid for tenders floated by public sector entities while contracts from private sector entities are mostly by invitation. Delay in awarding contracts, insufficient number of bidders, or lack of private sector contracts can adversely affect order inflow and revenue growth.

However, to mitigate some of these risks, SWPEL has entered new domains such as seismic services, which has helped improve the order pipeline. SWPEL has also bagged many new orders from Private sector clients recently e.g. Arcelor Mittal India, Ultratech Cement Ltd., JSW Steals Ltd. etc. which did not need tendering route. Timely execution of order book of Rs 202 crore as on March 31, 2022, as well as build-up of further orders will remain key monitorables.

Liquidity: Adequate

The company had cash and cash equivalent of Rs 8 crore as on March 31, 2022. Bank limit of Rs 27 crore was utilised 79% on average for the 12 months through March 2022. Long-term debt is estimated at Rs 25 crore as on March 31, 2022, of which Rs 13 crore is payable over the next 12 months. The cash accrual, expected at Rs 20-25 crore per year, should be sufficient to cover debt obligation and incremental working capital requirement over the medium term.

Outlook: Stable

CRISIL Ratings believes SWPEL will sustain its credit risk profile supported by healthy order book providing revenue visibility over the medium term.

Rating Sensitivity factors

Upward factors:

• Substantial build-up of orders and healthy revenue growth of more than 20% along with sustained operating margin
• Significant reduction in receivables and inventory leading to rationalisation of working capital cycle

 

Downward factors:

• If revenue growth is muted and operating margins goes below 20%
• Further rise in inventory or receivables adversely impacting the working capital cycle
• In case of significant debt-funded capex is done in future, it will be constraining the financial risk profile

About the Company

Incorporated in November 2006 by Mr Vikas Jain and his co-promoter, Mr Piyush Jain, SWPEL undertakes drilling and exploration of coal, minerals and coal-bed methane. The company has expanded into aquifer (water) mapping programmes for state and central government agencies besides 3D and 2D seismic data acquisition and processing for renowned oil and gas companies in India. It also provides consultancy for geological field services, mobile field services, and other allied services. The company has 33 operational rigs with capacity to drill between 300 and 2,500 metres. The company was listed on the SME platform of NSE ‘Emerge’ on February 19, 2018 and migrated to the main board of NSE within a span of one year on April 18, 2019.

 

For fiscal 2022, operating income is estimated at Rs 118 crore and profit after tax at Rs 12 crore.

Key Financial Indicators

Particulars	Unit	2022	2021
Revenue	Rs crore	118	104
Profit after tax (PAT)	Rs crore	12	10
PAT margin	%	10.5	9.90
Adjusted debt/adjusted networth	Times	0.44	0.51
Interest coverage	Times	5.98	4.85

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Cash Credit*	NA	NA	NA	16.0	NA	CRISIL BBB/Stable
NA	Bill Discounting	NA	NA	NA	4.0	NA	CRISIL BBB/Stable
NA	Cash Credit@	NA	NA	NA	20.0	NA	CRISIL BBB/Stable
NA	Bank Guarantee#	NA	NA	NA	25.0	NA	CRISIL A3+

*Including dropline overdraft up to Rs 4 crore

@Upto Rs.5 Crores interchangeable to BG Limit

#Interchangeable with letter of credit up to Rs 3.0 crore